The insider.

IRA turns 30, lacking a sense of fulfillment

March 07, 2004|By Bill Barnhart, a financial columnist for the Chicago Tribune.

The individual retirement account turns 30 this year.

Mutual fund powerhouse Fidelity Investments brought out pearls, the traditional gift for married couples on this occasion.

Yet many Americans are estranged from the allure of tax breaks for retirement savings.

The IRA legislation, which was attached to a reform of federal pension laws in 1974, encouraged middle-class Americans to save for retirement by excluding IRA contributions from taxable income.

But the idea, as well as employer-sponsored programs such as 401(k)s, has not met its widely advertised goal.

According to Peter Orszag of the Brookings Institution, the median balance in tax-advantaged savings accounts held by Americans age 55 to 59 was about $10,000 in 2001--hardly an adequate retirement nest egg.

"Only about 5 percent of those eligible for IRAs make the maximum allowable contribution," Orszag told a House committee last month.

Orszag and others fear that tax-advantaged savings programs merely hand upper-middle-class Americans who would have saved anyway a tax break they don't require.

Two other issues deserve attention in this IRA anniversary year.

The IRA legislation was part of a needed reform of laws governing traditional employer-sponsored pensions.

But the reform had a perverse effect. It ushered in the abandonment by employers of responsibility for their workers' retirement welfare.

Experts still debate whether individuals are up to the task forced upon them by employers eager to jettison the fiduciary obligation of pension benefits.

At the peak of the Nasdaq bubble, one member of Congress observed: "You have tens of millions of people who are inexpert at investment matters and have every reason to be inexpert at investment matters, who have now been placed in a very daunting function, which is the investment of ever-larger sums of money to last them across decade after decade.

"The evidence we have suggests that they have not done it, this investment function, as well as they could."

On another point, IRAs, 401(k)s and the like have been a marketing bonanza for Wall Street. In the last 30 years, assets in mutual funds have soared to a record-high $7.54 trillion from $35.8 billion in 1974, thanks partly to IRAs and other savings tax breaks.

A vast expansion of the distribution of equity and debt securities to American households ensued. In particular, the stock market became sexy.

But wider distribution of securities does nothing to improve performance of companies issuing securities.

Empowering Americans to manage their retirement savings does not, by itself, make them better off, especially when tax breaks for saving help endanger other federal benefits, such as Social Security.

"It's not more people owning stocks that makes stocks more valuable. The value ultimately derives from the corporations," said Roger Lowenstein, author of the new book "Origins of the Crash" (Penguin Press).

A case in point: The inflation-adjusted annual return on U.S. stocks in the 30 years since the enactment of IRAs was 7.5 percent, down from 8.7 percent in the 30 years before IRAs, according to Ibbotson Associates.

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Bill Barnhart is a financial columnist for the Chicago Tribune. E-mail him at yourmoney@tribune.com.